"Hi Madamswer care to give your input on the GUD FY22 results?"...

"Hi Madamswer care to give your input on the GUD FY22 results?"

@noomxx,

Apologies, I missed your post as I was away from my PC on the day of the result.

In summary, I think the market got it's knickers in a knot about something that is totally outside of the company's control, namely the OEM factory backlog and the fact that has had a significant impact on a business that was acquired by GUD only in November last year - namely, APG which at the time of the acquisition was slated to earn $80m to $84m in EBITA for CY2022, but which at the half-year mark earned only $26m (!)

This production backlog, which struck in earnest after March, is captured in the following chart (the black line, representing the Ford Ranger, is the one to which APG is particularly exposed):





Make no mistake, sentiment towards APG is unlikely to turn rosy very soon; it is likely that, in the current half-year, APG doesn't make much improvement at all on the $26m EBITA earned over the past 6 months.

Which means GUD would have paid $750m to buy a business generating just $50m in EBITA in the first year of ownership, compared to an expectation which would have been more like $85m to $90m.

That is what has most irked the market, I suspect.

I guess one could argue that global supply chain issues were already starting to appear when GUD management signed off on the acquisition of APG, and so management should have at least partly factored in the chance of disruption to OEM supply.

But, hey, it would need a very high level of clairvoyance to have been able to predict 30%, 40% and 50% declines in production of certain vehicle types.



The other aspects which I suspect caused the market some peptic discomfort was the relatively soft cash conversion and relating to that, the level of borrowings and interest cover metrics at the year-end balance date.


But the way I invest is that, instead of being at the spot where the puck is now (the place where everyone is), I skate to where I believe the puck is going to go.

And I think that in 12 or 18 months, the APG business would be trading normally (in fact, I wouldn't be surprised if it was over-earning at that point due to the current pent-up demand for new vehicles), and the balance sheet will have begun to repair itself organically (this business model has several imperfections, but lack of prolific surplus capital generation is definitely not one of them).

That's where the puck will be, I reckon, and so that's where I am waiting (earning a 5% fully franked income while I do so).

.